The main incentive programs that allow homeowners to benefit from solar energy include: Contact online >>
The main incentive programs that allow homeowners to benefit from solar energy include:
With the average cost of solar energy systems coming in at around $16,000, making the switch to solar is a substantial investment. Still, while the upfront numbers can feel intimidating, there are incentives at federal, state and local levels that can help ease the impact of solar panels for your home. This guide on solar tax credit by state will help you navigate the numerous offers available, saving you big on your installation cost and setting you up for long-term cost savings.
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A tax credit is a direct reduction in the amount of tax an individual or business owes to the government. Unlike tax deductions that reduce taxable income, tax credits eliminate the actual tax liability, providing a dollar-for-dollar reduction in taxes owed. Tax credits cover various areas, such as childcare, education and energy efficiency, incentivizing certain socially or economically beneficial actions by providing financial relief through the tax system.
Tax credits typically have specific eligibility criteria, meaning taxpayers must meet certain qualifications or undertake particular actions to qualify. Credits can vary in value, with some being fixed amounts based on qualifying steps taken or purchases made, while others offer a percentage of the total amount spent.
Also referred to as the solar Investment Tax Credit (or ITC), the federal solar tax credit aims to encourage investments in renewable solar energy. The tax credit covers a specific percentage of the solar system''s costs, reducing the taxpayer''s federal income tax liability by that amount. It applies to both solar panel equipment and installation costs but does not cover any structural modifications made to support the panel.
To qualify for the federal solar tax credit, the taxpayer must own the solar energy system. Those in a lease or a power purchase agreement (PPA) with the solar installer aren''t eligible for the tax credit, as they aren''t considered system owners. Additionally, the taxpayer''s tax liability has to cover the amount of the credit. Any remaining credit can carry over to subsequent years if the full amount isn''t met in that year''s tax bill.
Congress implemented the Inflation Reduction Act in 2022, which brought several significant changes to the solar tax credit. Most notably, it extended the timeline to 2035 and increased the credit amount from 22% to 30% through 2032. Those who installed a system in 2022 and haven''t claimed the credit yet can increase their credit amount to 30%.
The federal solar tax credit covers the following:
You may qualify for the federal solar tax credit if your installation meets these criteria:
Pro Tip
“There is also a business tax credit that can be used which is similar for large and small businesses as well as a direct pay tax credit that can be used for non-profits or other tax-exempt organizations.” – Roger Horowitz
To be eligible for the federal solar tax credit, you need to install a solar-powered energy system that provides electricity to a U.S. residence. Solar panels, solar water heaters and energy storage devices are all included in the credit.
Solar water heaters feature a solar collector and storage tank, harnessing the sun''s thermal energy to heat the water. To qualify for the tax credit, solar water heaters must be certified by the Solar Rating Certification Corporation or a similar entity that your state endorses.
Solar panels, or photovoltaic (PV) panels, are flat structures resembling windows that convert sunlight (in the form of photons) into electricity. There are three types of solar panels—monocrystalline, polycrystalline and thin-film—that can significantly decrease your electricity expenses.
Standalone energy storage devices with a capacity rating of 3 kilowatt hours (kWh) or more are also eligible for the solar tax credit. These do not need to be tied to a solar system to qualify.
After purchasing and installing your solar power system, the tax credit can only be claimed once. You can work with your solar provider to obtain the necessary documentation and apply the credit to your taxes. Here are the steps to claim the solar tax credit:
To get the most from the federal solar tax credit, the best time to go solar is any time before December 31, 2032. The credit reduces in 2033 and 2034, and is set to expire in 2035. If it''s within your budget and you have a long-term plan to go solar, getting it done sooner can maximize your potential energy savings and ensure you get the full tax credit.
Most solar rebates, tax credits and renewable energy certificates for new solar customers won''t directly impact the solar ITC. However, they can reduce the credit amount if they lower the total cost of the installation. For instance, utility rebates are subtracted from your system costs before calculating the tax credit. Also, payments received for renewable energy certificates may be considered taxable income, potentially increasing your federal tax liability.
As for state government rebates, these generally won''t reduce federal tax credits. State tax credits for solar installation typically don''t affect federal costs directly. Still, claiming a state tax credit might raise reported taxable income on federal taxes due to reduced state income tax deductions, which can affect federal tax liability.
In addition to the solar ITC at the federal level, some states offer incentives for new solar system purchases. The Database of State Incentives for Renewables & Efficiency has specific details for each participating state.
State government rebates for solar energy are typically a set amount of money given to those who purchase a solar system or other qualifying solar technology (e.g. solar water heaters and solar batteries). These are typically available regardless of whether or not the homeowner owes any federal taxes.
Part of the EPA Green Power Partnership, a Solar Renewable Energy Certificate (SREC) is a state-level solar incentive. SREC markets operate based on renewable energy certificates that symbolize the rights to non-power aspects of renewable electricity generation. These SRECs represent each megawatt-hour generated from solar systems.
In states with SREC markets, homeowners and businesses with solar systems can lower their energy costs by selling associated SRECs to utility companies. Supply and demand determine the monetary value of an SREC, with much of the demand coming from electricity suppliers needing to comply with their state''s Renewable Portfolio Standard (RPS) or pay a compliance premium.
Pro Tip
“SRECs are a brokerage commodity so the pricing varies, but many brokers offer three- or five-year fixed prices for those who are more risk averse. SREC income is typically considered taxable income.”- Roger Horowitz
Along with rebates and tax incentives at the federal and state level, there are several other potential avenues to save on the cost of installing solar panels.
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